Obama’s Fed Risk Regulator Plan Fades as Lawmakers Back Council

By Alison Vekshin

July 23 (Bloomberg) -- The Obama administration’s plan to expand the Federal Reserve’s powers to oversee financial firms is failing to win supporters in Congress as some lawmakers back a proposal to give the responsibility to several regulators.

“It’s going to be shared authority,” House Financial Services Committee Chairman Barney Frank, whose panel will write the measure, told reporters July 21, without providing details.

Frank and lawmakers leading discussion on regulatory reform fault the central bank for slow action on lending abuses and want the Fed to focus on monetary policy. Support is emerging for a council of the Fed, Treasury Department, Federal Deposit Insurance Corp. and other regulators. The Senate Banking Committee will consider the systemic-risk plan today.

“The more eyes on the problem the more likelihood that someone will raise an alarm,” Representative Spencer Bachus, top Republican on the House panel, said in a July 21 interview.

Obama, as part of the overhaul of U.S. financial rules, released a proposal last month giving the Fed power to supervise all large firms “whose failure could threaten the stability of the system” regardless of whether they own a bank.

The administration said the proposal is aimed at avoiding failures similar to insurer American International Group Inc., which has required a U.S. rescue package valued at more than $182 billion, and investment banks Lehman Brothers Holdings Inc., which is being liquidated, and Bear Stearns Cos., bought by JPMorgan Chase & Co. with U.S. backing.

Fed Chairman Ben S. Bernanke downplayed the extent of the new powers while testifying yesterday to the Senate Banking Committee. The Fed supervises almost all firms that would likely fall under its review, he said.

‘Specific Role’

“We’d have a very specific role, which is to supervise and look at the systemic implications of a specific set of companies,” Bernanke said.

Lawmakers fault the Fed for taking more than a decade to use authority Congress gave the central bank to write rules aimed at protecting consumers.

Senate Banking Committee Chairman Christopher Dodd and Richard Shelby, the panel’s top Republican, are concerned about giving the Fed additional power.

“Monetary policy is the primary function,” Dodd, a Connecticut Democrat, said yesterday in an interview. “The Fed’s job is to be somewhat of a cheerleader on the economy, whereas a systemic-risk regulator is the cop.”

White House National Economic Council Director Lawrence Summers said it was too early to dismiss the Fed idea.

‘Best Way’

“I think it’s way premature to be talking about anything like that,” Summers said in a July 20 interview with Bloomberg News. “We’re very focused on what we think is the best way to contain these risks.”

Senator Charles Schumer, a New York Democrat and a member of the banking panel, said he supported the Obama plan.

“The Fed has one major advantage that the opponents would have to answer, which is they have knowledge,” Schumer said in a July 22 interview.

Shelby, of Alabama, said the Fed has “utterly failed” at regulation.

“We’d better look at the role of the Fed,” Shelby said yesterday. “You load the Fed up with too many responsibilities and I think it weakens the Fed.”

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.